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Short sellers have been attacking the fintech company’s business practices for over a decade with little reward—until now

Investors betting against shares in Wirecard AG WDI -35.29% , the stricken German fintech company, hit a prodigious payday this week. For some passionate critics of the company, the reward wasn’t just in money, but in vindication.

Before Wirecard revealed more than $2 billion of cash was missing from its business on Thursday, investors who bet on stocks to decline had made it one of their most popular targets. That set up what may have been one of the biggest paydays for short sellers on a single stock in years.

Short sellers, who borrow shares and sell them hoping to buy them back for less in the future, notched paper profits of $2.6 billion off Wirecard’s plunge, according to data-analytics firm S3 Partners. Bets by the eight funds with the biggest short exposure to Wirecard, including in options markets, delivered paper profits of $1 billion according to Breakout Point, a research service.

New York-based Slate Path Capital and two U.K. funds, TCI Fund Management and Marshall Wace, had the biggest short positions Wednesday and are up as much as €184 million ($227 million), €161 million and €136 million respectively over the past two days, Breakout Point estimates. Other funds that were short include Darsana Capital Partners, Samlyn Capital and Viking Global Investors.

The path to riches was hardly linear. While critics were proven right in the end, gobs of money were lost over the years as the company’s share price marched higher, wiping out short bets.

Wirecard runs vital, but little-noticed technology that connects online merchants, consumers and the banking system. It has attracted attention from hedge funds questioning its accounting for so long that some are no longer in business. Blue Ridge Capital, which began shorting Wirecard in the mid-2000s, according to people familiar with the firm, closed down in 2017.

“It’s finally impossible for anyone to avoid what’s been going on and how this company has operated,” said Fahmi Quadir. Her boutique New York fund, Safkhet Capital Management, has had a quarter of its capital devoted to shorting Wirecard since last year.

John Hempton of Bronte Capital in Australia has been betting against the company for about a decade. It has been a costly experience: In that time, its shares went from less than €7 each to nearly €200 at their peak in 2018. They finished Friday at €25.82, down 75% over two days.

It was painful also because Wirecard made an aggressive defense against the criticism. Some investors said they purposely kept their short bets below the threshold required for disclosure for years to avoid catching the company’s attention.

Matthew Earl, who runs a research and investment firm called ShadowFall Capital & Research in London, spent more than £100,000 ($123,000) on legal and other fees defending himself when the company pursued him over critical reports in 2016.

Under the name of Zatarra Research & Investigations, Mr. Earl and a former partner, Fraser Perring, accused Wirecard of corruption, corporate fraud and lax money-laundering controls in part related to illegal online gambling, allegations the company denied at the time.

In December of 2016, Mr. Earl received letters from Wirecard’s outside lawyers that accused him of defamation and malicious falsehood among other things. He noticed a car parked outside his home, which followed him to the train station on at least one occasion.

In one of the letters, reviewed by The Wall Street Journal, Wirecard’s lawyers, Jones Day, confirmed that “private investigators undertook limited and lawful surveillance.” They argued this was necessary to ensure he was available to receive an urgent letter and denied that it was “disruptive, persistent or intimidatory.”

Jones Day declined to comment.

Mr. Earl, who has had no bets on the company’s shares since the Zatarra episode, and others, including Blue Ridge Capital, suffered cyberattacks, which they believed were connected to their Wirecard positions. The Citizen Lab, part of the Munk School of Global Affairs & Public Policy at the University of Toronto, found in a report this month that hackers engaged in sustained targeting of short sellers, journalists and investigators working on topics related to Wirecard. Mr. Earl was one of those targeted by a group based in India, according to the report.

The company didn’t respond to requests for comment on claims of hacking, surveillance or intimidation Friday. In an earlier statement on its website, it said: “Wirecard AG has at no time been in direct or indirect contact with a hacker group from India.”

Complicating matters for the shorts, Wirecard found allies in Germany’s financial regulator, BaFin. The government watchdog opened multiple investigations into potential market manipulation by Wirecard short sellers over the past decade, including against Mr. Earl.

In 2019, after the Financial Times published a series of critical articles about Wirecard’s accounting, the company sued the newspaper. BaFin then opened a probe against the lead writer.

BaFin also took the unusual step of banning short selling against the company for a stretch after the Financial Times articles caused the stock price to drop. It was the only time Germany had banned short selling outside of a financial crisis and involving a single company.

BaFin more recently took aim at Wirecard, launching an investigation this year into its executives over the timing of the release of insider information.

Marc Cohodes, a veteran short seller who invests his own money, said Wirecard’s aggressive defense inspired him to get involved at the beginning of 2019.

“It’s not about the money,” said Mr. Cohodes. “This is all about principle.”

Nikkei -0.06% Hang Seng -0.53% CSI +0.43% Shanghai +0.29% Shenzen +0.60%

Eur$ 1.1201 CNH 7.0715 CNY 7.07723 JPY 106.92 GBP 1.2391 CHF 0.9508 WTI$ 39.70 -0.13%

S&P +0.14% Nasdaq +0.27% EuroStoxx -1.51% FTSE -0.84% Dax -1.61% SMI -0.81%

Macro :

- JPMorgan Says Investors Should Get More Selective in Second Half

- German Economy Should Have Worst Behind It, Weidmann Tells FAZ

- A ‘Buy Everything’ Rally Beckons in World of Yield Curve Control

- ECB Looks to Defuse German Legal Timebomb Threatening Stimulus

- Conte Says Italy Will Probably Seek to Widen Budget Shortfall

Keep an eye on :

- AIR FP : Airbus Targets Voluntary Job Cuts Before Any Wider Staff Layoffs

- AMS SW : AMS Launches Offering of EU1b Equivalent Senior Notes

- MT NA : ArcelorMittal Weighs Sale of Canada Infrastructure Assets: FT

- BBVA SM : BBVA Signals Possible Improvement in Costs in Call With Analysts

- CPR IM : Lagfin to Purchase 30M Campari Withdrawn Shares

- COB LN : Cobham’s Owner Advent Selling Axell Unit to Rcapital: Sky News

- CDR SM : Codere Secures up to 150M Credit Line to Pay Debt: Confidencial

- GSK LN : FDA: GSK Recalls Two Lots of Children’s Robitussin

- GLEN LN : Swiss Bribery Probe Adds Another Legal Headache for Glencore

- BELI FP : Guangdong Wencan Plans to Buy 61.96% Stake in Le Belier

- MNZS LN : John Menzies Sees Earnings Ahead of Expectations

- MMB FP : Capton, Niel, Pigasse to Buy Rest of Mediawan, Lagardere Studios

- LHA GY : Lufthansa CEO Says Bailout May Not Pass on Lack of Support

- LHA GY : Lufthansa Braces for Portentous Week With Future on the Line

- MRL SM : Merlin Properties to Distribute EU68.5M in Gross Dividends

- NESN SW : Nestle Plans to Expand Swiss Nespresso Plants, CEO Tells SamW

- NESN SW : Dreyer’s Says to Change Name of Eskimo Pie: Rolling Stone

- NOVN SW : Novartis Discontinues Hydroxychloroquine Clinical Trial

- PRY IM : Carlisle Ends Draka Feleca Deal Due to Regulatory Approval Delay

- RNO FP : Renault Hasn’t Drawn From EU5 Billion Credit Facility: Delbos

- TSLA US : Musk Says Tesla Delayed Shareholder Meeting to Sept. 15

- FP FP : Total Said to Weigh Sale of Cray Valley Chemical-Additives Unit

- WDI GY : DWS to File Lawsuit Against Wirecard and ex-CEO Braun: Spokesman

- WDI GY : Wirecard Cut to Junk by Moody’s; May Be Cut Further

- WDI GY : Wirecard Says it Has Hired Houlihan Lokey for Financing Strategy,

- WDI GY : No Missing Wirecard Funds Entered Philippines, Central Bank Says

- WDI GY : Wirecard Says Missing $2.1 Billion Probably Doesn’t Exist

- WDI GY : New Wirecard CEO Has Few Days to Calm Nervous Investors

* Adecco Raised to Reduce at AlphaValue

* Carrefour Raised to Overweight at JPMorgan; PT 17 euros

* Fevertree Drinks Raised to Outperform at RBC; PT 2,500 pence

* Grafton Raised to Add at Peel Hunt

* Hilton Worldwide Raised to Overweight at Barclays; PT $90

* Hunting Raised to Buy at Goldman; PT 340 pence

* Marriott Intl Raised to Overweight at Barclays; PT $105

* Partners Group Raised to Buy at Goldman; PT 1,000 Swiss francs

* Siemens Gamesa Raised to Overweight at JPMorgan; PT 18 euros

* Tenaris Raised to Buy at Goldman; PT 7.60 euros

* Tenaris ADRs Raised to Buy at Goldman; PT $17

* Travis Perkins Raised to Buy at Peel Hunt

>>> Down

* Ashmore Cut to Sell at Berenberg; PT 331 pence

* Bodycote Cut to Sell at Goldman; PT 520 pence

* Kraft Heinz Cut to Sell at Goldman; PT $30

* Maersk Cut to Hold at NYKREDIT; PT 8,800 kroner

* Man Group Cut to Hold at Berenberg; PT cut from 160 to 148 pence

* Metall Zug Cut to Hold at MainFirst; PT 2,300 Swiss francs

* Siemens Cut to Hold at LBBW; PT 96 euros

* Vestas Cut to Hold at NYKREDIT; PT 700 kroner

>>> Initiation

* Nikola Rated New Neutral at JPMorgan; PT $45

* X5 Retail GDRs Rated New Overweight at Morgan Stanley; PT $40

>>> Call

* Ashmore Cut on Tough Outlook, Man Group Downgraded: Berenberg

* Fevertree’s U.S. Opportunity is Intact, RBC Raises to Outperform

* Royal Mail Estimates Cut on Costs Offsetting Parcel Volume: Citi

Higher volumes and wider spreads have driven outsized returns for market makers

Citadel Securities and its majority owner Ken Griffin are among the big winners from a boom in retail investing, cashing in on the zero-fee trading that has lured huge numbers of first-time investors to the US stock market.

Chicago-based Citadel Securities accounts for 40 of every 100 shares traded by individual investors in the US, making it the number one retail market maker, according to Piper Sandler. The company is a big buyer of customer trades from the leading US retail brokerages such as Charles Schwab and TD Ameritrade, which have slashed commissions to zero to keep up with fast-growing challengers such as Robinhood.

Citadel Securities pays tens of millions of dollars for this order flow but makes money by automatically taking the other side of the order, then returning to the market to flip the trade. It pockets the difference between the price to buy and sell, known as the spread.

Easy access to the market against the backdrop of wild swings in prices have led to higher trading volumes for stocks and options this year — increasing the raw material Citadel Securities uses to turn a profit. At the same time, the rise in volatility has forced spreads wider, increasing the potential income for market makers.

“In the stay-at-home environment people don’t have anything to do and are locked in front of a computer,” said Rich Repetto, an analyst at Piper Sandler.

Citadel Securities, a sister firm to Citadel, Mr Griffin’s Chicago-based hedge fund, is privately held and does not share financial data. But Virtu Financial, the closest rival to Citadel in retail market making with about a one-third share, acknowledged a sharp upturn during its first-quarter earnings presentation last month. It called the higher volumes and wider spreads a “powerful combination” that “drove outsized returns for market makers”.

Virtu’s figures offer clues to the profits on offer. Earnings from market making, which in Virtu’s case included retail and institutional orders, jumped 267 per cent in the first quarter from the same period a year ago to $652m. Money spent on buying order flow, the biggest cost after exchange and clearing fees, increased much less, up 167 per cent to $62m.

Shares in Virtu have leapt 47 per cent so far this year, while the broader financials sector is down 18 per cent.

“Not only are retail market makers getting increased trading volume, they are likely getting increased profitability per trade,” said Tyler Gellasch, executive director of Healthy Markets Association, a trade group.

Payment for order flow, or PFOF, is a controversial practice. Some critics chafe at the idea that a Wall Street giant such as Citadel — run by the richest man in Illinois — can profit from activity on platforms such as Robinhood, which was explicitly set up to “democratise” the business of share trading.

“We didn’t build Robinhood to make the rich people richer,” co-founder Baiju Bhatt told the FT in 2016. “The mission is to help the everyman, the rest of us, to be part of the financial system.”

Critics of PFOF also argue that market makers can, in theory, “front run” orders by, for example, jumping ahead of a customer’s stock purchase to buy it themselves, making a small gain if the share price increases.

Some wave away the idea, saying that concerns over front-running should be limited to ultrafast proprietary trading groups targeting big block trades from institutional investors that can move the market, rather than smaller orders from everyday investors. Instead, supporters of PFOF highlight the fact that retail customers tend to receive better prices from market-makers than are available on the stock market.

Citadel Securities said that its handling of retail trades in the first quarter “resulted in significant savings for [investors] and underscored the value that liquidity providers like us bring to this market”.

What is clear is that PFOF has become vital to the brokers, who rely on the revenue to offset a collapse in commissions from trading.

TD Ameritrade made $202m from selling its equities and options order flow in the first quarter, according to company filings, the most of the big brokers, including $83m received from Citadel Securities. TD Ameritrade said the amount of orders sent to any particular market maker “is reflective of their outperformance” in achieving a price that matches or beats the stock market. The brokerage said it monitored trades to ensure customers received fair prices and used the proceeds from PFOF to invest in its platform.

Robinhood’s revenues from equities and options order flow came to $91m for the period, with $39m from Citadel Securities. In the past, the company paid to settle charges with Finra, the US regulator, for failing to properly monitor trades sent to market makers.

Robinhood and Virtu declined to comment.

France shows Europe can keep Covid-19 in check after reopening

Overall trend in Spain, Italy and Germany is lifting hopes for summer, despite an emergence of clusters

On June 21, like every year since 1982, France held its Fête de la musique — a feat few had imagined possible only weeks ago.

The novel coronavirus that paralysed France for months and has yet to be eradicated made its presence felt: the all-night street music festival featured fewer concerts and DJ sets than usual, and organisers had to come up with creative safety measures — such as musicians playing on mobile stages mounted on the back of trucks.

But the event going ahead at all is one indication of the country’s relative success at keeping the coronavirus at bay after easing its nationwide lockdown last month.

Since May 11, when President Emmanuel Macron ordered the gradual reopening of schools and businesses, the rate of Covid-19 infections has slowed — including in Paris and the north-eastern region where the epidemic struck most fiercely. This has prompted Jean-Francois Delfraissy, France’s top scientific adviser, to declare that the virus was “under control”.

With social distancing measures still in place and the wearing of face masks made compulsory on public transport, new cases have lately stood at about 450 per day, from a peak of 7,500. Since easing the lockdown, the weekly number of Covid-19 patients sent to hospital has more than halved. France is to allow all businesses to resume and all children to return to school from Monday.

“We are going to get back to our art de vivre and recover our taste for liberty,” Mr Macron told the French on June 14.

Similar promising trends have been observed across Europe. According to the European Centre for Disease Prevention and Control, which monitors the pandemic in 31 countries including the UK, new daily cases have declined 82 per cent since April 9, when they reached a peak, with only three countries reporting higher numbers than in the past two to three months, during the height of the outbreak.

In Spain, according to contentious official figures, only 154 cases were diagnosed on Thursday, compared with 373 registered on May 11 when the country began to carefully lift its own harsh restrictions. Overall daily case rates have fallen 98 per cent since the peak in late March.

A senior Spanish health official said infections were continuing to decline, if at a lower rate than two months ago, before the lockdown was eased. “The trend is still going down, although more gently,” he said, noting that a greater proportion of infections was now being detected because of better testing.

Italy has also been detecting 200-300 new infections per day this month. Germany last week recorded about 300 cases per day on average, down from around 4,000 per day from March to April.

The exceptions in Europe are the UK, which was late imposing restrictions, and Sweden, which never implemented any: both were still detecting more than 1,000 new daily cases in the week through June 17.

The emergence of clusters is a constant reminder the epidemic can rebound, however.

Infections in Rouen, north-west of Paris, have pushed the virus’ reproduction rate — so-called R — above 1.5 in the region, meaning one Covid-19 patient on average infects more than one person. Over the weekend, 1,000 people linked to an abattoir tested positive in North Rhine-Westphalia, taking Germany’s R number to 2.88, from 1.06 — albeit from a low number of cases to start with.

Reimpositions of restrictions in South Korea and Beijing also suggest caution is in order. The number of infections in France remain higher than what those countries would accept.

France is better prepared for a second wave. When the pandemic struck, it lacked testing capacity, faced equipment shortages and had to transfer patients to Germany and Switzerland. As a result the country paid a high price to the pandemic with more than 29,575 deaths, one of the world’s highest figure per capita.

It has built up its testing capacity to 700,000 per week and trained a staff of 6,500 people to do contact tracing. As the disease ebbs, such resources are not being used fully. About 194,000 diagnostic tests were performed last week, and less than a third of the contact tracers are still at work tracking down infections.

Yonathan Freund, an emergency doctor at the Pitié-Salpêtrière Hospital in Paris said operations were now “back to normal” after a flood of Covid-19 patients in April.

“All the signals [were] very, very positive,” he told the Financial Times. “The epidemic has been stopped in its tracks, even if we are not really sure why . . . If it comes back we’ll see it much earlier and be able to take measures to socially distance and test and isolate people.”

The pandemic is retreating from minds too. In Paris, café terraces are crowded, traffic is back and fewer passers-by wear masks. Romain Siavy, a hair stylist, said some of his clients have stopped wearing masks. Uptake of the government’s smartphone tracking app has been low: over the past two weeks, only 1.7m users have downloaded it, or 2 per cent of the population.

Some public health officials are worried the epidemic will gather pace again as complacency settles in.

“The first wave is ending in Europe and in France, but the epidemic is far from over and the virus is still circulating in a heterogenous way,” Jérôme Salomon, a health ministry official, told parliament on Tuesday. “It would be irresponsible not to prepare for a second wave in autumn or winter.” He added he expected more cases during the summer holidays.

Martin Blachier, an epidemiologist at Universite de Versailles Saint Quentin, cautioned France’s increased testing and tracing capacity may not withstand a second wave.

“The health brigades can handle a situation like the current one where the virus is circulating at a low level,” he said. “But they will be overwhelmed if infections accelerate.”

Investors dismiss prospect of ‘V-shaped’ recovery

CFA members warn of huge risk of asset mispricing as stock markets disconnect from real economy

Investment management professionals have rubbished the idea of a quick global recovery from the coronavirus crisis, warning of several years of stagnation and a huge risk of asset mispricing as stock markets become increasingly disassociated with economic activity.

The CFA Institute, the global association of investment management professionals, found only 10 per cent believe a quick “V-shaped” recovery was likely based on a survey of almost 13,300 of its members.

The vast majority expect a slower recovery: 44 per cent forecast a medium-term hockey stick-shaped recovery, which implies some form of stagnation for two to three years before a pick-up, while 35 per cent opted for a U-shaped recovery, suggesting they were mildly more optimistic in the short term.

Only 4 per cent, however, forecast long-term economic stagnation, akin to economist “Dr Doom” Nouriel Roubini’s warnings of a lost decade.

The survey also found members were increasingly concerned about asset mispricing, with 96 per cent saying the crisis had elevated the risk of this occurring. Liquidity dislocation (38 per cent) and distortion of natural market pricing because of government intervention (36 per cent) were cited as the chief reasons for asset mispricing risk.

Olivier Fines, author of the report, said the fiscal and monetary firepower unleashed by governments and central banks had increased liquidity in markets, but this had created “inflated” asset prices.

“You have a separation between the real economy and markets right now and you are hoping it doesn’t get too big before a correction takes place,” he said. “At some point markets will have to have something to do with the real economy.”

Margaret Franklin, chief executive of CFA Institute, said the investment industry was poised for further market volatility, but it was split on how long government intervention and support of companies and markets should continue.

Respondents believed the swift intervention of governments and central banks to support the economy and markets was necessary, but half said the aid should be short-term while 49 per cent said it would be insufficient because it would need to continue.

“What we have seen from markets is that central banks and governments are expected to step in and take over from markets,” Mr Fines said. “Markets are growing addicted to this form of intervention.”

Some 84 per cent of those polled believe a review of exchange traded funds should be undertaken to determine the nature of their impact during the crisis.

A separate survey from State Street, the bank, found that half of 250 European pension funds, insurance companies, sovereign wealth funds, foundations and endowments polled do not anticipate a V-shaped recovery. Fifty-four per cent believed that economic activity would not return to normal before the end of 2021 and 11 per cent stated the crisis would last beyond 2022.

Despite this, 44 per cent of respondents said the interventions from governments and central banks would result in a faster economic recovery than that which occurred after the 2008 financial crisis.

Sixty-six per cent of respondents said dramatic falls in asset values and funding levels caused by the latest crisis would prevent them from meeting short-term investment objectives, but half expressed confidence that they would not miss their long-term goals.

Joerg Ambrosius, head of Europe, Middle East and Africa at State Street, said: “Asset managers now face one of their greatest challenges and will see how well-positioned they are, for a return to the ‘normality’ that awaits us all, as we emerge from this crisis.”

Deloitte says impairments could trigger insolvencies as sector accounts for oil price fall

US shale companies could be forced to write down at least $300bn of their assets in the second quarter, as operators begin to account for the oil-price collapse on their balance sheets, according to a new study.

The huge impairments — about half the net value of the companies’ property, plant and equipment — would increase the sector’s leverage from 40 per cent to 54 per cent, triggering insolvencies and restructuring, says the study by Deloitte, an accountancy.

“As Covid-19 impacts amplify pressures on shale companies through 2020, a wave of impairments may prompt the deepest consolidation the industry has ever seen over the next six to 12 months,” said Duan Dickson, vice-chairman of Deloitte’s US oil and gas business.

The writedowns, based on an oil price of $35 a barrel, would be another blow to a sector that has been hammered by the worst oil-price crash in decades. US crude output has plummeted as operators shut wells, idle rigs and sack oilfield workers.

Rystad Energy, a consultancy, calculated that shale producers’ impairments in the first quarter were about $38bn.

By the end of May, 18 exploration and production companies had declared bankruptcy this year, according to Haynes and Boone, a law firm. Denver-based Extraction Oil & Gas recently joined the list. Chesapeake Energy, an early shale pioneer, is likely to follow soon.

At a US oil price of $35 a barrel, almost a third of shale producers are insolvent, reckons Deloitte — unable to meet longer-term liabilities from free cash flow.

The US oil benchmark was trading at about $40 on Friday, but has averaged less than $27 this quarter. In April, it briefly traded below zero, sending shockwaves through a shale patch that, on average, needs about $45 to turn a profit.

Consolidation is likely. But Deloitte thinks only 27 per cent of shale companies would offer enough value for buyers. And only large independents or supermajors such as Chevron and ExxonMobil still have the financial strength to make acquisitions.

The sector’s vulnerability stems from the fast rate at which shale production declines, meaning new wells must constantly be drilled to replace fast-falling output at other ones.

“You’re on a capital treadmill just to maintain your production and that treadmill moves very fast,” said Scott Sanderson, a principal in Deloitte’s Houston office.

Soaring output in recent years depended on Wall Street’s willingness to keep funding that treadmill with new capital.

“The boom in fracking was largely financed by debt,” said Mohsin Meghji, head of M-III Partners, a restructuring adviser working with some bankrupt shale producers.

But investors have now soured on shale. Wall Street is unlikely to fund a new recovery or pay for the consolidation analysts say the sector needs.

“There was a sense that capital markets were going to dry up,” even before the crash, said Mr Sanderson. “Now the window is completely closed.”